Are pensions one big rip-off?

walkern

Hello,
I've just received my yearly pension statement (paying in 18%, about £8000 a year - 50/50 with companey). It says at current rate my pot will be worth £405,000 at retirement.

Searching for annuities the best I can find with spouse gives £10,000.

This means I won't get anywhere near my money back unless I live to about 105.

On top of that you can't not buy an annuity (all you can do is take a cash lump sum part of the annuity) - I believe you have to purchase a pension with your money.

So, are they worth it? seems to me like I'm paying in all this money, I could die not long after and I'm being shafted with a very poor pension.

I get the impression we pay a fortune all through our life for the pension companies to make a fortune in trading then they give us nothing back at the end.

Seems like I'd be better off putting the minimum in to get the company part then putting my own money in long term savings/stocks and taking the cash at the end?

Neil.

dunstonh

Searching for annuities the best I can find with spouse gives £10,000.

You need to search better.

This means I won't get anywhere near my money back unless I live to about 105.

Your calculations are wrong then.

On top of that you can't not buy an annuity (all you can do is take a cash lump sum part of the annuity) - I believe you have to purchase a pension with your money.

You have a pension. You dont purchase another pension. You either purchase an annuity or use one of the other options.

So, are they worth it? seems to me like I'm paying in all this money, I could die not long after and I'm being shafted with a very poor pension.

Bad research can often lead to wrong opinions.

I get the impression we pay a fortune all through our life for the pension companies to make a fortune in trading then they give us nothing back at the end.

Put it in the savings account, pay more in implicit charges and get less back if you feel that way. It would be wrong but if it makes you happy....

Seems like I'd be better off putting the minimum in to get the company part then putting my own money in long term savings/stocks and taking the cash at the end?

As these options would produce less income, why do you think they are better?

JoeCrystal

walkern wrote: »

So, are they worth it?

Yes... You got matched company contribution (which many, including me would envy) AND tax relief. You would be much poorer instead if you did not pay into a pension.

Go on, just work out how much you actually get after tax if you would not be paying into pension and compare the amount of the total contribution from you and employer gross? How much poorer would you be, percentage wise?

Cheers,
Joe

hugheskevi

Are pensions one big rip-off?

Do you mean pension providers or annuities, or both?

Searching for annuities the best I can find with spouse gives £10,000.

About 2.5% - which will include some inflation protection.

On top of that you can't not buy an annuity (all you can do is take a cash lump sum part of the annuity) - I believe you have to purchase a pension with your money.

Google flexible drawdown and capped drawdown.

This means I won't get anywhere near my money back unless I live to about 105.

Your calcs are wrong, probably as you are not factoring in inflation. You will find that taking into account the returns on gilts, breakeven will be a year or two higher than normal life expectancy at age 65.

So, are they worth it?

For those who are higher/additional rate taxpayers, who have employer contributions, are in receipt of means-tested benefits or have access to salary sacrifice, then in most cases yes. It is less clear for those that don't have any of those things.

I could die not long after

You can purchase spouse protection, or use drawdown so the pension pot is passed on.

I get the impression we pay a fortune all through our life for the pension companies to make a fortune in trading then they give us nothing back at the end.

Seems like I'd be better off putting the minimum in to get the company part then putting my own money in long term savings/stocks and taking the cash at the end?

For long term, saving in cash deposits is not a good idea.

The same companies you use to invest in stocks will be offering pensions on much the same terms.

Don't confuse pension providers with annuities, they are 2 separate things.

Perelandra

There's four different parts to consider to answer the question "are pensions one big rip-off?"- from what you've said below, I think you've only touched on one of them (the first in this list).

1) Annuity versus drawdown. You have the option on retirement to buy an annuity, but this isn't the only thing you can do. You can also leave (part of) the pot invested in stocks and shares, and draw an income (either from dividends, or selling the investments) from this. If you don't feel the annuity is giving a fair income, take the drawdown option.

Even if annuities are a rip-off (and I'm not saying they are at all!), it's not the pension that is. The pension is just a wrapper for your retirement investment.

2) Tax-efficiency. Depending on your income when you are building up the pot, and your income when you are in retirement, a pension can give you a greater tax incentive than investing directly. However, it can also put you in a worse tax situation- that's an unlikely event, though (your income in retirement would have to put you in a higher tax bracket than when working). For most people, the worst-case would probably still be a benefit, due to the tax-free lump sum. So in this regard, certainly not a ripoff.

3) Costs/charges. There will normally be a cost, either explicit or hidden, in the running of the pension itself. If these costs are too high, then yes- it's a ripoff. They're controllable, though, so this isn't a fault of the pension "system" itself. Something you need to keep an eye on.

4) Sometimes pensions don't grow as fast as people would hope. This is either because of unrealistic expectations, or due to incorrect investment decisions. Either way, with the exception of the costs/charges in "3" above, it's important to remember that exactly the same return would've been made of the investor had bought the same product outside of a pension. It's not the pension that has created that underperformance.

So, no overall I don't reckon they're a ripoff

walkern

I just did a simple calculation. 405,000/10,000 gives about 40. So even with a small inflation rise this is a long time before an annuity paid out what was paid in. I appreciate there are other factors, but that calculation was the entire basis for my thought - if I get an annuity I won't get anywhere near what I paid in.

I tried various online annuity sites and the only time it got any higher than about 10-12k was when I said I was a smoker.....

I'll look at drawdown, I've never heard of them.

I'd rather have the option of taking 100% of the pot, buy a house, live off the rent then leave the house to my children. But that's not allowed I expect as it give me too much of the money I've saved up

dunstonh

I just did a simple calculation. 405,000/10,000 gives about 40.

That explains your mistakes.
1 - £10,000 level is not a correct annuity rate.
2 - you forget abou the tax free lump sum

I'd rather have the option of taking 100% of the pot, buy a house, live off the rent then leave the house to my children. But that's not allowed I expect as it give me too much of the money I've saved up

Your figures are all wrong though. Making such important decisions on inaccurate data is foolish.

You say that £8000 a year goes into the pension with employer paying half. So, that is £4000 from you and £4000 from employer. You get tax relief on your part (and possibly reduced NI but I will leave that off as you dont say). Assuming you are a basic rate taxpayer, you get £800 tax relief. So, your annual cost is £3200.

I will totally ignore growth as the rate of return is the same in all wrappers if you use the same investments. It is just the tax and maturity method that differs. You dont say your age currently. So, i will use a term of 20 years as a guide. However, again it makes no difference to the break even point.

If you used your own investments instead of pension you would have £3200x20 = £64,000
If you used the pension, you would have £8000 x 20 = £160,000.

The pension can pay back 25% tax free. That is £40,000. The remaining £120,000 using a 5.5% annuity rate for level income is £6,600 a year. Your own investments using the same income rate (to keep things fair) would pay £3,520 a year.

So, you think the pension is the rip off despite the following figures for the same net contribution:
pension £40,000 lump sum with £6,600 a year
Your savings/investments £3520 a year (cant spend the £64000 as you need it for income)

If you used the pension lump sum for income as well then that takes the pension to £8,800 a year. More than double the option you think is better.

Breakeven point on the pension for your net contribution would be 2.7 years.

ajbell

I understand the tax efficiency side of this argument and the employer contribution, I have 2 final salary pensions and pay into AVC as well, but if you separate the accrual side of the argument and look at just buying the annuity then it does look like a rip off.
Luckily I will be ok in retirement with my final salary pensions but may have to buy an annuity with my AVC. Can the experts here not see that an annuity does not seem like good value for your money excluding the employer contribution and tax relief.
So how would you justify purely buying an annuity and not getting back what you paid in?. Shouldn't an annuity be able to stand on its own and give a return without employer contributions and tax relief?.

Proxy

walkern wrote: »

I just did a simple calculation. 405,000/10,000 gives about 40. So even with a small inflation rise this is a long time before an annuity paid out what was paid in. I appreciate there are other factors, but that calculation was the entire basis for my thought - if I get an annuity I won't get anywhere near what I paid in.

The main factor is that if you're only getting £10,000 per annum without any inflation protection then you need to look harder. If you are getting inflation protection then you're not factoring it in and you will get "your money back" at way before 104.

Proxy

ajbell wrote: »

I understand the tax efficiency side of this argument and the employer contribution, I have 2 final salary pensions and pay into AVC as well, but if you separate the accrual side of the argument and look at just buying the annuity then it does look like a rip off.
Luckily I will be ok in retirement with my final salary pensions but may have to buy an annuity with my AVC. Can the experts here not see that an annuity does not seem like good value for your money excluding the employer contribution and tax relief.
So how would you justify purely buying an annuity and not getting back what you paid in?. Shouldn't an annuity be able to stand on its own and give a return without employer contributions and tax relief?.

On average, most people will get back what they paid in.

An annuity is not an investment plan. It's a mortality swap designed to give you security, not high returns. If you want high returns, feel free to put it all in drawdown and speculate on technology start-ups.

Some people will die young and feel ripped off in heaven. Some people will live to 105 and be grateful for their guaranteed income.

It's called pooled insurance. Not everyone gets the best deal, because it has to pay for those who live for longer than they're supposed to.

Do you complain to your car insurer that you didn't get the value out that you paid in?

dunstonh

I have 2 final salary pensions and pay into AVC as well, but if you separate the accrual side of the argument and look at just buying the annuity then it does look like a rip off.

No it doesn't. Income is subject to market rates at the time. If you dont like annuity rates then dont buy an annuity. Drawdown is closer to what you do with alternative options. Draw the same rate from both and the pension will provide more.

So how would you justify purely buying an annuity and not getting back what you paid in?

Because most people get back more than they pay in.

Shouldn't an annuity be able to stand on its own and give a return without employer contributions and tax relief?.

It is designed to provide a guaranteed income for life. It isnt about making money. Its about meeting a promise. If you want to attempt to make money then use the unsecured pension option and not the secured pension option.

Can the experts here not see that an annuity does not seem like good value for your money excluding the employer contribution and tax relief.

And you think cash savings are any better at the moment?